Are You a LEAN Mean Dealer Machine?

Are You a LEAN Mean Dealer Machine? Greg Fenn Professional Advisor Lawrence, KS (785) 842-6498 Greg@KEAAdvisors.com Mark Martincic Professional Advisor Lawrence, KS (785) 842-6498 Mark@KEAAdvisors.com

2 The views and opinions presented in this educational program and any accompanying handout material are those of the speakers, and do not necessarily represent the views or opinions of NADA. The speakers are not NADA representatives, and their presence on the program is not a NADA endorsement or sponsorship of the speaker or the speaker s company, product, or services. Nothing that is presented during this educational program is intended as legal advice, and this program may not address all federal, state, or local regulatory or other legal issues raised by the subject matter it addresses. The purpose of the program is to help dealers improve the effectiveness of their business practices. The information presented is also not intended to urge or suggest that dealers adopt any specific practices or policies for their dealerships, nor is it intended to encourage concerted action among competitors or any other action on the part of dealers that would in any manner fix or stabilize the price or any element of the price of any good or service.

3 Learning Objectives Identify the key LEAN concepts and how to apply them to your dealership. Discover how to measure, assess and change the culture to a LEAN based organization Learn how to successfully execute on a plan in the midst of your day job. Steps to LEAN Improvement 1. Identify the customers and determine how the provides value to them 2. Reduce obvious waste with layout, better information-sharing, smaller batches, 5S, visual management, & scheduling 3. Separate repetitive es from unique es and find ways to make unique es repetitive 4. Map the flow to determine value-added and non-value-added activities 5. Identify bottlenecks and causes of variability 6. Focus Kaizen projects on es that cause bottlenecks and variability 7. Identify opportunities for cross-training to improve performance LEAN is a set of principles and behaviors that underlie the Toyota Motor Corporation's managerial approach and production system. Toyota first summed up its philosophy, values and manufacturing ideals in 2001, calling it "The Toyota Way 2001". It consists of principles in two key areas: continuous improvement, and respect for people. Contents 1. Overview of the principles 2. Research findings a. Long-term philosophy b. Right will produce right results c. Value to organization by developing people d. Solving root problems drives organizational learning 3. Translating the principles Overview of the principles The two focal points of the principles are continuous improvement and respect for people. The principles for a continuous improvement include establishing a long-term vision, working on challenges, continual innovation, and going to the source of the issue or problem. The principles relating to respect for people include ways of building respect and teamwork. Long Term Philosophy Principle 1: Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals.

4 The Right Process Will Produce the Right Results Principle 2: Create continuous flow to bring problems to the surface Principle 3: Use the "Pull" system to avoid overproduction Principle 4: Level out the workload (Heijunka) Principle 5: Build a culture of stopping to fix problems, to get quality right the first time Principle 6: Standardized tasks are the foundation for continuous improvement and employee empowerment Principle 7: Use visual controls so no problems are hidden Principle 8: Use only reliable, thoroughly tested technology that serves your people and es Add Value to the Organization by Developing Your People and Partners Principle 9: Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others Principle 10: Develop exceptional people and teams who follow your company's philosophy Principle 11: Respect your extended network of partners and suppliers by challenging them and helping them improve Continuously Solving Root Problems Drives Organizational Learning Principle 12: Go and see for yourself to thoroughly understand the situation (Genchi Genbutsu) Principle 13: Make decisions slowly by consensus, thoroughly consider all options; implement decisions rapidly Principle 14: Become a learning organization through relentless reflection (Hansei) and continuous improvement (Kaizen) What You Need to Do: Commit to implementing a LEAN Production System. Assign key project Champions, Team Leaders, Team Members, Trainers as required. Create and deploy a LEAN-based vision for the future of your operations. Enroll the entire organization in the effort. Set up and conduct periodic Steering Committee meetings to ensure appropriate leadership of the effort. Measure and track overall progress.

5 Minimizing Waste in Your Processes What is Waste? Anything that does not add value is considered waste or muda. Taiichi Ohno, founder of the Toyota Production System, identified seven (7) wastes. 1. Time: Waiting for people or services to be delivered Time when people, es or equipment are idle 2. Defects: Waste related to costs for inspection of defects in materials and es, customer complaints and repairs 3. Motion: Unnecessary movement or movement that does not add value. Movement that is done too quickly or too slowly 4. Transportation: Conveying, transferring, picking up, setting down, piling up and otherwise moving unnecessary items. 5. Inventory: Excessive amounts of supplies, materials, or information for any length of time. Having more on hand than what is needed and used. 6. Processing: Unnecessary es and operations traditionally accepted as necessary. 7. Overproduction: Producing what is unnecessary, when it is unnecessary, and in unnecessary amounts. There are two (2) types of waste Type 1: Wasteful activities that add no value but are currently required Type 2: Wasteful activities that add no value, are not required, and can be eliminated immediately. Type 2 wastes should be eliminated and then focus on Type 1 wastes.

6 Exercise: Lead a Waste Walk Leader Instructions Identify a small team and lead them through a waste walk on their genba. Distribute sticky notes to all members on the waste walk. Distribute a Waste Exercise Form to each member so that they have a copy of the waste wheel for reference. Ask all team members to write examples of the wastes they see on individual post it notes while on their walk. Remind them to use one note per waste they see End the walk when all team members have successfully identified at least seven examples of each of the seven wastes. On a flip chart, draw a quick and crude waste wheel. One by one, have each team member describe their waste and place it on the waste wheel. Challenge the team to generate ideas to eliminate the wastes they have identified. 9. Answer the questions below. Answer the following questions: 1. What were your lessons learned from leading this exercise? 2. What would you do differently the next time you lead a waste walk on a team s genba?

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Process Improvement Calculations & Tools Hierarchy of Process Discovery This is the evolution of detail of analysis: 1. SIPOC to provide high-level scoping of the 2. Swimlane Diagram to document steps, and illustrate wastes of hand-offs 3. Value Stream Map to identify product,, and information flows with value-add percentage 4. Process Map to illustrate key inputs needed for detailed problem-solving

Name Description When to Use Process Discovery SIPOC A diagram that provides high-level scoping of the. Suppliers provide inputs to the Example: Input required resources Process transforms inputs to outputs Outputs delivered products or services. Customers stakeholders; identify what the provides and delivers to the customer. Start with this diagram to determine the scope and stakeholders. Reference and update throughout the maturity states. Swimlane Diagram Create a flow chart of activities that includes roles. Example: Use during discovery to understand how things currently operate. It provides the foundation for the future state. 9

Value Stream Mapping A technique of diagramming the flow of information and materials representing a to provide a product or service to identify product,, and information flows with value-add percentage. [run on sentence; break up sentence] Use to visually illustrate waste and apply costs to the. Example: Start with this diagram to determine flow. Reference and update throughout the maturity states. Process Mapping The activity of representing es so that the current may be analyzed and improved. Example: Develop a map to capture the current state. Reference throughout the maturity states. Selecting Process Metrics Select the metrics that best help visualize a and address the specific issues of interest. While documenting the current state, quantify cost, service, and quality. Highlight areas of value, waste, and bottlenecks. Consider metrics that are relevant to the specific business. Consider establishing simple, quick ways to collect performance data on an ongoing basis. Operational Measures Customer Priorities Financial Measures Flow time Throughput Inventory Process cost Quality Utilization Price Quality Time Variety Profits (absolute) ROI, ROA (relative) Cash flow (survival) 10

Name Description When to Use Selected Process Improvement Tools There are many tools and measurements you may use to analyze performance and identify issues. This is a selected list of tools and calculations we are likely to use. 5S Method for organizing the workplace 1. Sort get rid of anything unnecessary 2. Set-in-Order make important items visible and self-explanatory 3. Shine clean the work space and equipment 4. Standardize establish guidelines for sorting, ordering, and shining. 5. Sustain adhere to these rules. Develop an audit system or rating system if needed. 5 Whys Ask Why? until you get to the root cause. Five iterations of questioning usually achieve identification of the root cause. This could be conducted by one person who is knowledgeable about the or among a team. Analysis of Variance (ANOVA) Available Time Batch Size Cash Flow A statistical test to determine if the means of several groups are equal. The amount of time an organization is open for business and able to the work. Remove time dedicated to other es and break time. This refers to employees completing tasks for several components before providing them to the next step in the. For example, scheduling specific work to be done only on certain days, or completing ten documents before sending them to an editor. If completed work is passed along to the next immediately or in small batches, the flow becomes more efficient. Movement of cash into or out of an organization during a specific time period. In ITS, this would likely focus on operational cash flows; cash received or expended as a result of business activities. This is one of the first steps of continuous improvement. It is useful from initial improvement throughout the life of a. Use during the early stages of maturity. Use to analyze variability. You may wish to calculate or estimate batch size for the map to identify waste. Reduce batch size as a strategy for improvement. This is a financial measure you may wish to use to identify concerns. 11

Name Description When to Use Capacity Cellular Layout (a.k.a. Production Cell Layout) Changeover Time Coefficient of Variation Continuous Flow Processing Defects Per Million Opportunities (DPMO) Demand Rate First Pass Yield (FPY) The ability to produce an output. It is derived from the output produced and the potential output which could be produced if the capacity were fully recognized. Put different functional performers in the same physical location. This reduces hand-off and transportation delays. The time it takes to change from one activity to the next. This is analogous to setup time. It may refer to changing from one task to another, setting aside the first task. This requires some re-acclimation time. This is a good measure of variability. It is the ratio of standard deviation to average. We measure it both for customer arrivals and services. If you don t have variability data, assuming a coefficients of variation of 1 results in a practical worst-case estimate. Cs = Std Dev / Average Designing a work environment so people who provide hand-offs to others are located close to each other to avoid delay. Process work in small batches or avoid batching all together. Identify specific opportunities for defects in order to eliminate defects. In an office environment, this can apply to deliverables that require correction or rework. DPMO=Total Number of Defects/Total Number of Opportunities for a Defect, then multiply by 1 million. The number of transactions or outputs per a specified time period. For example, 500 items per year. You may also provide this as an average on a map. Demand Rate = 1 / Takt Time Multiply the individual quality measures for each. This represents the likelihood that a deliverable will go through all steps without a quality-related problem. Use as a strategy for improvement. Use to determine variability. Use as a improvement technique when appropriate. Review throughout the maturity states. Use this to measure performance. discovery. Reevaluate throughout the lifecycle. 12

Name Description When to Use Flow Time It is the sum of all time. Collect the actual time it takes a performer or to complete an activity, and total the activity times for the critical path. Use to determine the effects of variation and operational performance. Gantt Charts A bar chart that illustrates a project schedule. Use to illustrate time performance. Information Technology Used Inventory Kaizen Events Kanban Lead Time (L/T) Leveling This describes the software tools needed to information at each box in a map. Record this in a lower corner of the box. In an office environment, this can refer to queues of information, paperwork, electronic files, or project work in-development. On a financial report, you can use Accounts Receivable to indicate inventory. In inventory was sold, you have to look at actual revenue rather than Cost Of Goods Sold. Inventory = Throughput x Flow Time Inventory Turns = Throughput / Inventory In the service industry, it refers to activities that continually improve business functions. This is often executed as a meeting with key participants in a particular to brainstorm improvements. A scheduling system that prescribes what to produce, when, and how much. You may use kanban cards to indicate what supplies to reorder. A kanban card is a physical card that contains product details that can be used to order more materials when needed. Constant awareness of the demand rate is critical to this approach. The amount of time between the completion of one activity and the start of another. It often represents waiting time. Balancing workload among different employees or over time. This may require cross-training. Use throughout the maturity states. Use when implementing a pull system. Use as a strategy for improvement. 13

Name Description When to Use Multi Vari Number of People Takt Time Pareto Charts Represent variability in a visual way with a series of charts. [I don t recall this one. any opportunity for an example?] This may represent the number of people who are capable and trained to do the work, or the number of FTEs needed to perform the. Expected rate of demand (customer need). It is the rate of completing work based on customer need. Takt Time=Effective Working Time per specified time period / Requirement per specified time period Effective working time refers to the time of availability and resources that can be dedicated to producing the customer requirement. The time period you specify can be whatever is appropriate for that. Chart based on Pareto s Law: 20% of the causes contribute to 80% of the problems. A graphical technique used to quantify problems. Used to identify the vital few problems causing the greatest impact, so that correction effort can be focused at these, as opposed to fixing the trivial many. Use during discovery and redesign. Use when planning the future state. Percent Complete and Accurate (%C&A or %C/A) This metric reflects the frequency of complete and accurate information received for ing. Calculate this as simple percent of total. % C&A = (# Complete & Accurate / Total) * 100 14

Name Description When to Use Pitch Poka Yoke The duration of schedule we release to our system. Schedule work in short durations and check status at the end of the scheduled timeframe. Address workflow problems. Mistake-proofing. Example: designing a software screen or field so users cannot enter invalid information. Identify during discovery. Use when planning the future state. Reference and monitor throughout the maturity stages. Use as a strategy for improvement. Price Compensation in return for goods or services. This is a measure used to indicate customer priorities. Process Cost Total the direct and indirect costs incurred during a. This is an operational measure that can indicate operational performance and in planning improvements. Process Time (P/T) Profits Project Tracking Center This is a measure of the actual time to complete or an activity. It is the amount of time required for one person to complete and review an activity or. This may be presented as a range to indicate variation, along with a description of variation causes. Revenue that exceeds input costs: Profit = Revenue - Cost A board in a visible area close to the work that is used to record progress. Include metrics such as lead time, complete and accurate results, rework, time, etc. Use as a financial metric where these measures are relevant improvement drivers. Implement as a improvement strategy, and review throughout the. 15

Name Description When to Use Pull System Push System Quality Reliability Return on Assets (ROA) Return on Investment (ROI) Standard Deviation Standardized Work Throughput A system of producing outputs based on customer requests. Execute work according to first-in/first-out prioritization. Produce according to forecasting needs. This may lead to large inventories. In an office environment, this would refer to scheduling work according to due dates, monetary value, or some specific criteria. A measure of correctness. Quality may have some objective measures, such as delivering a product or service accurately according to specifications. There may also be subjective measures due to comparison to other products and services. Compare outputs or services to specification guidelines, and survey customers or end users as appropriate. The percentage of time that equipment is available when needed. For example, the percentage of time that the network is available or the computer is functioning properly. A measure of how profitable an organization is in relation to total assets. ROA = Net Income / Total Assets The ratio of gain or loss relative to the investment, usually expressed as a percentage. ROI = (gains costs) /costs x 100 A measure of variability. It indicates the range variation from the average. Calculate the mean, then the difference of each data point from the mean, then compute the average of the difference values and calculate the square root. Develop job aids and support materials to establish standard procedures The rate of good products or services produced per unit time that the customer is willing to invest time, money, or resources to obtain. Throughput = Inventory / Flow Time Use when there is a high degree of demand variability. Implement to reduce inventory. Use when demand is fairly predictable and production variability is low. This is an operational measure that can be used throughout the. Use as a financial measure to determine value. Use as a financial measure to determine value. Use to determine variability. Use throughout the evolution through maturity. discovery. 16

Name Description When to Use Time Time in Queue (CTq) Trend Charts Collect time measurements for value-added time as well as queue time for activities within a. CTq depends on: Cd=Coefficient of variation of customer arrivals Cs=Coefficient of variation of service u=utilization of the servers m=number of servers ts=average service time CTq = approx. V x U x T CTq = approx. ((Cd 2 + Cs 2 )/2) ( u 2(m+1) 1 ) ts m(1 u) A chart that reveals performance trends as you can draw a line between two or more pivot points. This is an operational measure that can indicate areas to target for improvement. Determine wait time. Illustrates performance over time. Use during discovery and evaluation. Utilization Value-Added Time Variability Utilization Time (VUT) The percentage of time that the is busy doing value-added work. Processes with high utilization indicate bottlenecks. Utilization = Demand Rate / Capacity Process time that is spent on value-added activities. This is a tool to relate capacity, variability, and inventory or delays and understand waiting times, capacity pooling and investment decisions. Utilization Formula=Rate of demand/rate of service Use to determine variability. Utilization = Rd / Rs 17

Name Description When to Use Variety Visual Control Voice of the Customer (VOC) X/Y Diagram (a.k.a. Scatter chart) This refers to customer priorities and demands. The more variety in demand, the more variety in the. This information can enable educated decisions for improvement, such as limiting variety, allocating resources to accommodate the customer needs, or establishing a pull system. Establish visual signals in the workplace to control an activity or. Signals can take many forms: Outlines for locations of tools or equipment Status indicator lights Display boards with metrics Direction indicators Capture customer s needs, and preferences. Organize and prioritize these to guide work production. You can obtain this information by conducting individual interviews, focus groups, surveys, etc. A chart that compares pairs of values for two separate measurements. This is a potential customer priority measure. Use this information to determine needs. Implement during the early stages of maturity. Use throughout a lifecycle. Use throughout the lifecycle. Use as a visual representation of variables to identify performance issues. Y = f (X) Calculate expected yield. Outputs are a function of the inputs. Y = f (X1, X2, Xn) Use during discovery. Conclusions from Data Analysis If throughput is less than the demand rate, all customer demand is not being met! The capacity of the is defined by the rate of the with the smallest capacity. To measure variability, you need to know average and standard deviation. Coefficient of Variation is a good measure of variability. It is the ratio of standard deviation to average. We measure it both for customer arrivals and services. So Cs=Std Dev/Average Systems with variability must be buffered by: o Inventory o Capacity o Time If you can t reduce variability, you ll pay in high inventory, under-utilized capacity, or reduced service 18

Time and Little s Law Inventory = Throughput x Flow Time Inventory Turns = Throughput / Inventory Identifying Process Improvements: Identify all improvements that will be necessary to implement the future state Create a list of Kaizen opportunities and annotate the map with them (Kaizen bursts) Prioritize the improvement opportunities Implement strategies that have immediate impact first Track significant efforts as projects Consider Six Sigma strategies for projects with unknown solutions and root cause unidentified Future State Questions What is the customer need and how are we doing in serving this need? Which steps create value and which are waste? How can we maintain workflow with fewer interruptions/handoffs? How can we manage prioritization and control interruptions and handoffs? How can a team balance the workload and/or different activities? What pitch would be most effective? (duration of schedule) What improvements and reviews will be necessary? 19

Successfully Implementing the LEAN Principles Beware of why organizations don t execute their initiatives? Why do only 10% of businesses execute their initiatives? 95% of employees do not understand the business strategy 75% of managers do not have incentives linked to the strategy 60% of the businesses do not link employee work efforts to the strategy Root Causes of Weak Execution: Clarity of Initiative (communication gap) Lack of Commitment to the goal (buy-in) Team and Individual Accountability Real Enemy #1: The Whirlwind Competing Forces Whirlwind day job URGENT It Acts on you Goals new activities IMPORTANT You Act on it Real Enemy #2: The Way It s Always Been Real Enemy #3: Resistance To Change 20

The Five Stages in the Change Cycle Successful Change and Transition Takes: Leadership Clear Vision, Plan and Purpose Clear Communication Purge dissent Buy-in Commitment It must be chosen NOT imposed Doing the right things for the right reason Patience and persistence The Challenge is To Implement the LEAN Principles and Initiative in the Midst of YOUR Whirlwind But How? 21

The 4 Principles of Execution Principle #1 1. Focus on the Most Important Goal the principle of focus The more you try to do the less you accomplish Keep it simple # of Goals 2-3 4-10 11-20 Principle #2 Natural Principle 2. Act on the Lead Measures the Principle of Doing and becoming Activities and behavior which drive performance toward the goal Two Kinds of Measurements: 1. Lead: Target measurements of goals (results) Sales, Profit, Market Share, CSI. Patient survival rates Meaning when you receive the results the performance that drives them is already in the past you can t fix it Spend most of our time Tells you if you have achieved your goal Like looking in the mirror 2. Lag: Measures activities you must do to reach the goal Measures new behavior to drive success of the goal Three characteristics a. Predictive for achieving goal b. Influenced by the team c. Leverage Tells you if you are likely to achieve the goal Understanding the lead measure is the most important insights Focusing on lead measures seem counter intuitive = most CEO s focus on the lag measures Lead measures will get you the what you want = lag measures Dr. Deming told executives that managing a company by looking at financial data (lag measures) is the equivalent of driving a car by looking in the rearview mirror. 22

Principle #3 3. Keep an Accurate Score the principle of engagement People play different when they re keeping score Emotionally engages team members Highest level of performance Best when designed by team members Keep it simple Characteristics of Scoreboard 1. Simple 2. Visible 3. Shows Lead and Lag measures 4. Easily tell if winning or losing Principle #4 4. Create a Consistent Tempo of Accountability the money ball Regular and frequent accountability meetings Best if weekly Members hold each other accountable for producing results despite the whirlwind Implementing the LEAN Processes at the Highest Level Be aware of: 1. Communication gap 2. Buy-in 3. Accountability gap 4. Whirlwind your day job 5. Inertia this is how we have always done it The 4 Principles of Execution: 1. Most Important Goals (2) the principle of focus 2. Act on lead measures- the principle of doing and becoming 3. Keep score the principle of engagement 4. Create a tempo of accountability the money ball Insanity: doing the same thing over and over again and expecting different results. -Albert Einstein References Metrics for IT Service Management A book by the IT Service Management Forum that considers the design and implementation of metrics in service organizations. Duenyas & Lynch, 2008, LEAN Office Certificate Program course materials, The University of Michigan Keyte & Locher, 2004, The Complete LEAN Enterprise, New York, NY http://www.wikipedia.org/ The 4 Discipline of Execution www.brainyquote.com 23